On a recent drive to Bengaluru with my younger colleague, Joystan, we had an interesting discussion on what truly drives long-term investment returns.
Joystan is young, aggressive, and pursuing CFA. His proposition was simple: focus on selecting the best stocks and mutual funds with minimal overlap and build an aggressive portfolio. According to him, this strategy should deliver superior long-term returns.
My perspective was a little different—perhaps shaped by age and experience.
I argued that while good security or fund selection can potentially add 1–3% per annum over the relevant benchmark over long periods, the bigger determinant of an investor's overall wealth is getting the asset allocation right.
Confused? Let me explain.
Consider an investor, Geetha, with a financial portfolio of ₹1 crore.
She has invested the entire amount in fixed deposits earning 7% per annum. Being in the highest tax bracket, she pays 30% tax on the interest, reducing her post-tax return to 4.90% per annum.
Scenario 1
Geetha invests only ₹10 lakh into tax-efficient actively managed equity mutual funds that deliver 15% post-tax returns, while the remaining ₹90 lakh continues in fixed deposits earning 4.9% post-tax. She likes tracking high return products for her Rs 10 lakh portfolio while Rs 90 lakhs stagnates in tax in-efficient banking products.
Her annual post-tax income becomes:
- ₹10 lakh × 15% = ₹1.50 lakh
- ₹90 lakh × 4.9% = ₹4.41 lakh
Total annual return = ₹5.91 lakh (5.91% on the overall portfolio).
Scenario 2
Instead, Geetha allocates ₹50 lakh to simple passive equity index funds earning 10% post-tax and the remaining ₹50 lakh to tax-efficient debt investments earning 7% post-tax.
Her annual post-tax income becomes:
- ₹50 lakh × 10% = ₹5.00 lakh
- ₹50 lakh × 7% = ₹3.50 lakh
Total annual return = ₹8.50 lakh (8.50% on the overall portfolio).
Notice something interesting.
The second strategy does not chase the highest-returning products. It simply improves the allocation between growth assets and conservative assets while remaining tax efficient.
The first strategy focuses on squeezing higher returns from a small part of the portfolio while ignoring the allocation of the remaining wealth.
This is why, over long periods, asset allocation usually has a far greater impact on overall portfolio outcomes than trying to identify the next winning stock, mutual fund or IPO. Security selection certainly matters—but only after the broader allocation decisions have been made correctly.
Yet most investors spend their time asking:
- Which IPO should I apply for?
- Which mutual fund will give the highest return?
- Which country or sector should I invest in?
Financial media and finfluencers are equally guilty of encouraging this behaviour because exciting stories attract attention.
At Naveen Rego Capital, a fee-only wealth management firm and a corporate SEBI Registered Investment Adviser, our investment philosophy has always been asset allocation first, product selection second.
We spend our time optimising the decisions that can make the biggest difference to long-term wealth rather than chasing the latest fashionable investment product.
Our approach may seem boring.
But boring has often proved to be financially rewarding.
For excitement, we suggest a holiday to Las Vegas—not your investment portfolio.
And yes, by the end of the journey, I had won the debate with Joystan.
More importantly, we had both gained a better perspective.
Are you spending more time chasing high-return products while your overall wealth allocation remains unchanged?
If you have missed any of our previous articles, please visit https://naveenrego.com/blog-grid.php?aW5pdGlhdGl2ZXNfdHlwZV9pZA=MQ
Happy Financial Planning!
Naveen Julian Rego – CFP®
MD & Principal Officer
Naveen Rego Capital
SEBI Registered Investment Adviser
Reg No: INA000019211
BSE Membership ID: 2178
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1. Investment in the securities market is subject to market risks. Read all related documents before investing.
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